Got a Yen for Japan?

Furthermore, Steinmetz says that current weakness in the Japanese economy will be "short-lived" due to the increase in regional activity, although he is not predicting an out-and-out boom either. Last week, the International Monetary Fund predicted economic growth of only 0.8% in Japan this year -- a big slowdown from the 2.6% increase registered in 2004. The IMF predicts Japan's economy will expand by 1.9% in 2006.

Big-Footing

Single-country ETFs can pose a puzzle for investors, because they are often dominated by just a handful of stocks. The iShares MSCI Mexico (EWW) ETF, for example, could easily be considered more of a Latin telecom fund than a single country ETF. The EWW holds close to a quarter of its assets in Latin American telecom giant America Movil (AMX) and nearly another 15% in Telefonos de Mexico (TMX).

The Japanese market is large and diverse enough to avoid that pitfall, and that shows through in the EWJ. The EWJ's largest holding is automaker Toyota(TM), at 6% of the portfolio. The top 10 names held in the fund -- which include globally recognized brands like Sony (SNE) and Canon(CAJ) -- account for less than 25% of total assets.

When it comes to tracking its benchmark, Morningstar analyst Dan Culloton says the EWJ has done a decent job, but it has its risks.

"Its shares have been known to trade at discounts and premiums of more than 1% to its net-asset value for short periods, which means buying at the latter and selling at the former can hurt returns," says Culloton.

Culloton's big concern is with the volatility of its returns, an understandable problem considering the difficulties fund managers have had in forecasting Japan's stop-and-go economy. Many fund managers, for instance, were underweight Japan in their global allocations in the 1980s when the country was dominant, and overweight in the 1990s when its economy was dismal.

"The EWJ has always been a popular fund, due to the inability of portfolio managers to get Japan right," says BGI's Chen.

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